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KB Toys Files for Chap. 11 Bankruptcy

An expected restructuring could include closing as many as 500 mall stores

January 15, 2004|Abigail Goldman | Times Staff Writer

KB is headed into BK.

KB Toys Inc. filed for Chapter 11 bankruptcy protection Wednesday, the latest victim of a bruising holiday-season price war that forced FAO Inc. to liquidate part of its business and cut into the sales and profits of other big-name toy sellers.

Pittsfield, Mass.-based KB, best known for its ubiquitous mall-based toy stores, said its restructuring could include closing as many as 500 underperforming stores. KB operates 1,200 stores -- 134 in California -- and employs 13,000 people nationwide.

Unlike FAO, a high-end toy seller saddled with the debt of several acquisitions, the 80-year-old KB should be able to recover from the troubles of 2003, said KB executives and others in the toy industry.

"I think that there's a place in the mall environment to have a toy store," KB Chief Executive Michael Glazer said. "We need to continue to go in the direction of having more exclusive toys and more licensed products that aren't available to the mass merchants."

Glazer said a four-year, $350-million loan from Fleet Retail Group Inc. would allow the company to continue normal operations during the restructuring.

"I have no concern about them disappearing," said Sean McGowan, a toy industry analyst at Harris Nesbitt Gerard. "They have the support of the vendors, they have some financing, and they have some stores that are profitable."

In December, KB indicated that cutthroat pricing among the three largest toy sellers -- Wal-Mart Stores Inc., Target Corp. and Toys R Us Inc. -- took a toll during what should have been prime selling season. In order to preserve cash, KB, which is privately held, said it was halting payments to some suppliers.

Some manufacturers became worried about KB's financial health even earlier. Video game maker Activision Inc. of Santa Monica said it stopped shipping products to KB three months ago.

Sales at KB declined as the discounters in particular duked it out for market share by selling some of the season's hottest toys below wholesale costs.

The price wars forced FAO to liquidate its Zany Brainy educational toy chain, sell its chain of Right Start stores and auction off its flagship FAO Schwarz stores in Manhattan and Las Vegas.

The competition also hurt Toys R Us, which said this month that 2003 profit would be lower than expected because total sales rose less than 1% during the crucial holiday period, and sales at U.S. stores open at least a year fell nearly 5%. The company in November shuttered its Imaginarium stores.

KB's problems were exacerbated because it has been locked into high rents in hundreds of ailing malls that no longer generate enough traffic to justify the expensive leases.

"If we didn't have a couple hundred of these stores with horrible leases, we wouldn't be doing what we're doing right now," Glazer said. "The incredibly aggressive pricing of some of the mass merchants was the straw that broke the camel's back."

Glazer said the company hoped to emerge from bankruptcy protection before next Christmas.

To succeed, KB will have to figure out how to differentiate itself from its competitors, noted Jim Silver, publisher of toy magazines for the trade and consumer markets.

"I think there's a little bit of an identity crisis with the consumer," he said. "When you say KB Toys, you think mall store. But what else do you think? Low prices? Closeout items? Hot toys? They've changed many times over the past few years."

For toy manufacturers, the outlook might not be good. KB's troubles are another indication of the growing power of Wal-Mart, which several years ago knocked Toys R Us off its perch as the nation's top toy seller.

"If you have one less customer, the big retailers have more leverage in controlling the pricing, the products and how business is done," said Charlie Woo, chief executive of MegaToys, a downtown Los Angeles-based manufacturer of inexpensive, imported toys.

"It's not surprising that's the trend -- because of more competitive prices, the profit margin gets squeezed and an operation like KB, operating where rent is more expensive, finds it more difficult to survive."

KB began as a candy company in 1922 operated by the Kaufman brothers. In 2000, a management-led team funded by Bain Capital Inc. purchased the company from Consolidated Stores Corp. of Columbus, Ohio.

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